Why Russia Can Live Without IMF Largesse

By Matt Taibbi and Alex Whiting, InterPress Service, 3 September
1998

MOSCOW, Aug 31 (IPS)—The West warns Russia not to allow
Communist-led opposition in parliament to force a backtrack on free
market reforms — lest the West be forced in turn to cut Russia
off from foreign bailout loans.

But the terms and targets of the last bailout package, 22.6 billion
dollars in new loans in July, played their own part in the present
crisis, say some.

Though the International Monetary Fund's (IMF) led loans were
ostensibly intended to stabilise the rouble, the actual effect was to
keep it far above its true market value. This benefited foreigners
more than anyone else.

The overvalued rouble, its exchange rate subsidised by the IMF, made
foreign products cheaper and Russian exports, hard to sell at the best
of times, especially unpalatable.

The predictable result of this situation was sharply reduced
industrial growth, a consumer goods market dominated by foreign
products, but until this month, a ‘stable’, market-proof
rouble.

“By devaluing the rouble so late, the situation was
worsened,” says David Dyker of the School of European Studies at
southern England's University of Sussex. “But there was a
lot of pressure from the IMF not to devalue—because of the Asian
crisis—- and this was bad advice.”

The devaluation eventually forced on Russia despite the spending of
eight billion dollars of its reserves, much of it IMF loaned, will
have many negative effects. But at the very least it may now force
Russia to make the kind of meaningful changes in its economy that was
postponed, if not deterred, by IMF funding.

IMF funds came with an emphasis on currency stability, the protection
of investors in government bonds and demands for more taxes from an
already tax-burdened populace. Russians have plenty of reasons to
disregard such strictures.

Russia collects plenty of taxes. Earlier this year, the Centre for
Economic Performance, a London School of Economics think tank, found
that Russia's overall government revenue in 1997 accounted for
33.3 percent of its gross domestic product (GDP). That was a full
percentage point above both the U.S. and Japan, which were at 32.1
percent.

But in an economic system where barter rules and everybody owes
everybody else, much of this income is declared to the state by
companies that ‘offset’ what they owe against what is owed
them. Then various tiers of the state system shaved off their share
from the income, keeping it rather than sending it up to Moscow for it
to hopefully send back later.

For example, a lot of customs revenue never entered the budget, but
was allocated instantly to the Customs Committees for their own
uses. As result of its reliance on these and other non-cash revenue
sources, the state was left with very little cash in h and, just
plenty of redistributed wealth.

“Russia's problem isn’t that it doesn’t bring in
enough revenue to meet its obligations,” says Robert McIntyre,
Fullbright scholar and an economist for the United Nations
University's Wider Institute. “Its problem is that it
doesn’t have enough cash t o deal with all of its financial
market obligations. That's why the IMF has emphasised tax
collection.”

Western investors and the IMF weren’t satisfied with
Russia's level of revenue collection mainly because much of the
state's “revenue” doesn’t come in cash.

If keeping the rouble high solved one western problem, stepping up
direct taxation would have solved another—it would have provided
the cash to keep paying out on some 40 billion dollars worth of
high-yield short-term Treasury bills, the so-called GKO s.

This satisfied both western investors, stuck into GKOs to the tune of
18 billion dollars, and Russia's new millionaire class, the
so-called ’oligarchs', nearly all of whom owned banks
heavily exposed to investments in GKOs.

“I have great respect for the professionalism of the IMF
economists, but I don’t think they see the whole picture,”
added Edwin Dolan of the American Business and Economics
Institute. “Russia needs growth more than it needs currency
stability.”

But Westerners with GKOs, unlike the Russian nation, needed currency
stability more than growth. Now the rouble has crashed, if Russia now
grows, Westerners with rouble investments will still lose.

“If you want to take a dark view of the IMF,” says one
Western economist, who asked not to be named, “you can say that
they’ve never shown any evidence that its goal is economic
development, and you could instead look at them merely as bill
collectors for the world financial community.”

As it turned out Russia decided to effectively default on the GKOs by
suspending their repayments. Taking the most positive spin on this
decision, this is saving money that was either going to Western
investors or Russian banks owned by the Russian oliga rchs'
mega-corporations.

The former are hardly likely to starve without it—unlike some
Russians—while the latter are overdue for a tapping.

According to the CEP, the 100 largest tax evaders account for over 40
percent of Russia's tax arrears. Those same 100 corporations were
also among the chief beneficiaries of cheap property sell- offs and
other state favours.

Although anti-corruption measures were a major component of the
IMF's recent East Asian bailouts, they were conspicuously absent
from the Russia bailout.

“It was fine to privatise but you needed to bring in very
muscular privatisation rules, such as you see in the United
States,” says Dyker.

“Monopolies were handed over to old government party members who
didn’t understand the concept of a level playing
field. “What has happened is that they have created a new rich
class and left the ordinary people with nothing. Monopolies have
simply cha nged hands.”

“(One) reason for high interest rates and low growth in Russia
(apart from the IMF austerity program) is a lousy investment
climate,” says Dolan. “Neither Russians nor foreigners
want to put their money in Russia. So fixing the problems of
corruption, bad corporate governance, etcetera, need to have a higher
priority than the IMF gives them.”

Now that this cash has effectively been taken away from them, there
may now be money to pay the millions of miners, teachers, bakers, and
factory workers who have been waiting for their salary arrears to be
paid, some for more than a year.

The value of their wages will be substantially less, but they will be
able to start buying again—and domestic products too, as
imported goods will be priced off the market.

Camdessus has personally warned Chernomyrdin against reversing reform.
“I had to leave him without any illusion that such polices would
benefit from any help from the outside world.” But given the way
that this outside help has been used in the past, R ussia may be able
to better manage without the IMF billions.

“The (last) IMF bailout was really a subsidy for the oligarchs,
for the Russian banks, and for investors in the financial
markets,” says McIntyre. “And it was undertaken in a way
that only made real economic problems worse.”

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